Quantitative Easing

Posted by Peter Dowd5sc on October 21, 2016

In the House of Commons on 15th September 2016 Peter contributed to the debate on Quantitative easing. Here is his speech.

It has been geek central in the House this afternoon. I thank the hon. Member for Ross, Skye and Lochaber (Ian Blackford) for bringing this debate to the Chamber. I agree that a marriage between fiscal policy and monetary policy, which works in a constructive fashion, is a fair point. I also agree with the hon. Member for Wycombe (Mr Baker) about the wealth inequality and wealth justice effects of QE, but that is probably as far as our agreement goes given that he is a member of the Austrian school.

As for my hon. Friend the Member for Bishop Auckland (Helen Goodman), she is always lively and insightful on these matters. She talked about inequality per se and the regional inequalities in particular, and how QE may be able to overcome them. The hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin) is modesty itself, and was as interesting as ever. Again, he talked about inequality and a better balance between fiscal and monetary policy. He said that the unintended consequences of QE must be a focus of attention. Finally, the hon. Member for East Lothian (George Kerevan) also talked about the unintended consequences of QE.

In response to a question about his confidence in the efficacy of quantitative easing, Ben Bernanke, the former chairman of the Federal Reserve, half-jokingly said that it worked in practice but not in theory. Such an off-the-cuff comment had some validity to it, but to an extent it is a moot point, and that is the very essence of today’s debate. Many Members will recall the former Labour Chancellor, Lord Darling, standing in this Chamber in 2009 talking about quantitative easing, or QE. Difficult times called for resourceful measures and the Labour Government had to consider all the potential policy responses to prevent or ameliorate a recession. This was not an isolated action; other countries have taken a similar path to some degree or other.

As Members will know, the first round of QE resulted in several tranches of gilt purchases—that was referred to earlier. By the 2010 general election, around £200 billion ​had been added to the Bank of England’s balance sheet, which still remains there to date. The predictions of wild hyperinflation, which came from some quarters, have been long forgotten. As I will suggest later, the precise effects of this relatively new approach are still being hotly debated, but we should all acknowledge the willingness of the Labour Government to consider policy measures outside the usual range.

Not long after taking office, the then Chancellor, the right hon. Member for Tatton (Mr Osborne), restarted the QE programme, giving authority to the Bank of England to print almost another £200 billion for the purchase of Government bonds. However, unlike the QE process under the last Labour Government, the post-2010 QE incarnation took place at the same time as the coalition Government were budgeting, year after year, for more and deeper cuts to public spending. As alluded to earlier, opinion remains sharply divided about the effectiveness of QE, but to judge its effectiveness, we must first agree, if possible, on what its aims were. However, there is little consensus on even that matter.

First, if the goal was to support nominal demand and prevent a deflationary spiral, there would seem to be broad agreement that inflation should have been lower without QE. Academic studies have consistently indicated that inflation, some five years ago, was around 1 percentage point higher than it would have been without QE.

Secondly, if the aim of QE was to support real GDP growth, there is, unfortunately, little agreement. The Bank of England estimates that economic growth would have been at least 1.5% lower in the absence of the first round of QE. Other economic studies have ranged from close to zero—no real effects at all—to around 2 percentage points of extra growth. The debate is likely to continue for some time, and of course the Labour party will watch developments closely.

A third potential motivation for QE was to increase the supply of credit. There is still considerable uncertainty about the extent to which QE has achieved this aim—a point touched on today. Last July, a post on the Bank of England’s blog argued that there was little evidence of QE having boosted the supply of credit:

“we find no evidence to suggest that QE boosted bank lending in the UK through a bank lending channel”.

Of course, other opinions are available.

When we look at the success or otherwise of QE, we must of course take into account the circumstances in which it happened. The first round of QE took place under conditions of supportive fiscal policy, as was referred to. Unfortunately, the Chancellor of the Exchequer between 2010 and 2016 adopted a fiscal approach at odds with that of almost every respected macroeconomist; he repeatedly targeted a smaller deficit, even when austerity measures failed to achieve their stated aim. His record will not be looked on favourably by history.

The Labour party welcomed the statement by the new Prime Minister and her Chancellor that they would ignore the only remaining target of the latest charter for budget responsibility, which lies in tatters after less than a year. A dawning realisation that a surplus is unlikely to be achieved in 2020 may have finally put an end to the failed economic approach that has characterised the past six years, but we remain in the dark about what will ​replace it. Britain is on hold while we wait for another two months to find out even the most basic outline of the new Government’s fiscal policy. The Labour party, and millions more nationwide, will hope that the new Chancellor, who sat at the Cabinet table throughout the last Administration, does not repeat the mistakes of the past.

Until the Chancellor pulls his finger out and finally outlines his plans, the Bank of England has sole responsibility for ensuring that the economy gets through the post-Brexit uncertainty. Last month, the Monetary Policy Committee announced the restarting of QE, including further purchases of £60 billion of Government bonds and up to £10 billion of corporate bonds. It is obviously too early to say whether these actions, which the hon. Member for East Lothian referred to, have delivered against any of the criteria mentioned earlier. Indeed, the statement of the MPC today in essence indicates that the Bank continues to keep a watchful eye on the effects of QE in particular and, more generally, the broader macroeconomic environment.

Last year, the European Central Bank began its own full-speed QE programme, similar in many regards to our own; it, too, includes bonds issued by institutions and agencies, including the European Investment Bank and the Nordic Investment Bank. Of course, if we had a UK national investment bank, another possible policy tool would be made available to the Bank—a point alluded to by my hon. Friend the Member for Bishop Auckland. Any decision about the potential use of QE in the context of a national investment bank would be made by the MPC.

My hon. Friend the Member for Hayes and Harlington (John McDonnell), the shadow Chancellor, pointed out in a recent Financial Times article that

“The operational independence of the Monetary Policy Committee is sacrosanct.”

That would include any decisions about QE, conventional or otherwise. However, set against any benefits of QE, there must be a serious consideration of any distributional impacts. As early as 2012, the Bank of England released a report looking at potential outcomes. It raised questions about the effect on pension schemes, especially those already in deficit. It concluded that the QE that had already taken place amounted to an increase in wealth of £10,000 per person, if it was equally distributed. Of course, as was said today, few think that the benefits of that increase in wealth have been equally distributed.

The Bank’s research suggests that as the action increased the value of assets, those who already hold assets will have benefited disproportionately. It notes that the wealthiest 5% of the population hold 40% of non-pension assets, but no one should be surprised by that: one of the aims of QE has always been to push down interest rates, and one of its effects has unquestionably been to push up the value of shares and other assets, including housing, and ownership of shares and other financial assets is distributed unfairly.

We would welcome any further study, to be conducted by the Government or others, on the effectiveness of unconventional monetary policy, so we support the motion. Most importantly, however, the country needs a signal from the Chancellor about his intentions for future fiscal policy, and waiting till November is not good enough. We know that lowering assumptions about ​future interest rates will keep down public borrowing, but we need to know whether or not the investment that the country urgently needs is finally on the way. We cannot afford to rely on the Bank of England alone to take responsibility for managing the macro-economy.